Report: Canadian manufacturing continues to contract in August 2023

Canadian manufacturing continued its downward trend in August. The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index (PMI), remained stuck below the crucial 50.0 no-change mark for a fourth successive month. Dropping to 48.0, from 49.6 in July, the index registered its lowest reading since June 2020 and was consistent with a modest deterioration in operating conditions.

Both output and new orders declined since the previous month. Job cuts were also apparent, while confidence in the outlook fell to its lowest since January. Price data showed that both input and output price inflation picked up since July.

Commenting on the latest survey results, Paul Smith, Economics director at S&P Global Market Intelligence said, “Canada’s manufacturing sector continued to struggle during August, with output and new orders falling at solid rates. Firms responded by cutting purchasing and utilizing existing inventories, and signalled some worries over the potential for demand weakness to linger in the months ahead.”

Sub-par performance in August reflected similar-sized reductions in both production and new orders. The decline in output was the steepest of the year so far, for orders the sharpest since March. Firms widely commented that elevated inflation and clients retaining a cautious attitude to spending were negatively impacting demand. However, sales weakness was primarily focused on the domestic market; new export orders rose modestly for the second month in a row during August.

Against the backdrop of a subdued market for their products, Canadian manufacturers adopted cautious approaches to purchasing and employment decisions during August. Buying activity was reduced for the 13th successive month and to the greatest degree since March. Firms signalled a preference for utilizing existing stocks, with inventories of inputs cut at the sharpest pace for over three years in August.

Staffing levels were lowered for a fourth month in a row, also at a rate not seen since mid-2020. Panellists signalled the non-replacement of leavers given concurrent falls in both production and new orders. Despite lower employment, capacity remained sufficiently high for firms to easily cope with overall workloads. The latest data showed that backlogs of work fell for the 13th month in a row.

On the price front, average input costs rose for a third successive month in August. The rate of inflation also picked up, accelerating to a four-month high amid reports of vendors raising list prices to cover their own cost increases. Manufacturers adopted a similar attitude, pushing up their own average tariffs to the greatest degree since March.

Confidence in the outlook remained positive. Firms are hoping for more evidence of supply stability in the coming months and were buoyed again in August by another marginal improvement in average delivery times. Some manufacturers also expect sales to improve, and that economic conditions will be more conducive to growth compared to present levels. However, others are worried that present market instability will linger and continue to weigh on production. Subsequently, confidence slipped to its lowest since January 2023.

Smith noted, “Despite further signs of product supply stability and a further drop in demand for inputs, inflationary pressures picked up as firms throughout the supply chain continued to push higher operating expenses onto their clients. Such persistence in inflation, albeit at much lower levels than typically seen since the onset of the pandemic, will naturally be a concern for policymakers. However, such worries are somewhat offset by the news that job shedding continued in August – and to the greatest degree since June 2020. This latest sign of weakness in the labour market may well therefore be enough for the Bank of Canada to take a pause in its monetary policy tightening cycle.”